One of the biggest challenges in retirement is ensuring that you will have a steady income stream to finance your lifestyle. Here we review the three key income sources that most Canadians rely on, and we highlight planning considerations for each.

1. Government pensions

Canada/Quebec Pension Plan (CPP/QPP). If you contributed to the CPP or the QPP, you’ll be entitled to receive a retirement benefit based on the number of years you contributed and your pensionable earnings.

Old Age Security (OAS). This benefit is available to all Canadians age 65 or older who meet residency requirements.

CPP/QPP and OAS planning considerations: Government pensions are not automatic; you must apply for them.

While most people start collecting CPP/QPP benefits at age 65, you can opt to take a reduced benefit from age 60 (if you stop working), or a higher benefit as late as age 70.

OAS is subject to a clawback requiring high-income earners to repay some or all of their benefits. (As of 2008, this starts to apply if net income exceeds $64,718; the full OAS pension is eliminated at an income of $105,043.)

CPP/QPP and OAS benefits are taxable, and do not qualify for a pension income credit.

2. Employer-sponsored pensions

Defined benefit plans. If you were a member of a defined benefit plan (DBP), the amount you receive in retirement is set in advance, based on years of service and income level.

DBP planning considerations: DBP benefits may or may not be adjusted for inflation, depending on provisions of your plan. An indexed pension will provide better protection against the erosion of purchasing power since the benefits are increased in line with inflation.

DBP benefits are taxable as regular income.

Some DBPs are integrated with the CPP. So, someone who retires prior to age 65 may find that their pension income amount drops after age 65.

There is generally a survivor benefit for a spouse or common-law partner. Income from a DBP qualifies for the pension income credit.

Defined contribution plan (DCP). Your retirement benefit under a DCP is not based on a set formula but depends on the amount contributed into the plan (by both employer and employee) and how well investments perform. At retirement, the accumulated value of the plan is used to purchase either a life annuity or a Life Income Fund (LIF).

3. Personal savings

Retirement Savings Plan (RSP). Most Canadians rely on personal savings to “top up” other sources of retirement income. The most common option is the RSP. It can be converted at any time to a Retirement Income Fund (RIF) to provide an ongoing income stream.

RSP planning considerations: You must collapse your RSP in the year you turn 71. Most people choose to convert the plan to a RIF to keep investment income tax-deferred.

A minimum amount (based on age) must be withdrawn from your RIF every year. If your partner is younger, and you wish to withdraw as little as possible, you can opt to use your partner’s age to calculate the minimum withdrawal.

There is no maximum withdrawal limit unless the plan originates from a registered pension plan and is locked-in (LIF or LRIF).

Since RIF payouts are taxable as regular income, a large withdrawal may trigger an OAS clawback.

Income from your RIF does not qualify for the pension income credit unless you are aged 65 or over.

Non-registered savings. Non-registered accounts offer great options for tax planning, since certain types of investment income receive preferential tax treatment.

Non-registered savings planning considerations: Dividend income and capital gains receive more favourable tax treatment than interest income. So, if you have both registered and non-registered assets, you should consider allocating equity assets to non-registered accounts, while keeping interest-bearing instruments inside your registered plans.

A new way to split

Spouses and common-law partners may now split income from registered pensions, qualified RIFs and annuities. If your spouse or common-law partner is in a lower tax bracket in retirement, you can reallocate income to reduce taxes payable by your household.

There are many considerations involved in determining your retirement income. Professional advice can help you create or adjust your plan to meet those needs.